Cheap Credit, Lending Operations, and International Politics: The Case of Global Microfinance

Abstract

The provision of subsidized credit to financial institutions is an important and frequently used policy tool of governments and central banks. To assess its effectiveness, we exploit changes in international bilateral political relationships that generate shocks to the cost of financing for microfinance institutions (MFIs). MFIs that experience politically driven reductions in total borrowing costs hire more staff and increase administrative expenses. Cheap credit leads to greater profitability for MFIs and promotes a shift toward noncommercial loans but has no effect on total overall lending. Instead, the additional resources are either directed to promoting future growth or dissipated.

Determinants of the Performance of Microfinance Institutions: A Systematic Review

“…Finally, some studies look at the determinants of the costs of financing. Garmais and Natividad () find that being rated strongly cuts the cost of financing, particularly for commercial lenders. Rated MFIs also lend more efficiently.…”

Theorizing global imbalances: a perspective on savings and inequality

“…Even poor individuals with positive future income prospects or job security developed habitual profligacy as a result of easy access to inexpensive credit in the presence of a strong consumerist ethic and of ignorance regarding future consequences. In an environment of modern credit facilities and expanding loan offers, spending became constrained by liquidity rather than by income (Garmaise and Natividad 2013).…”

Funding Financial Inclusion: Institutional Logics and the Contextual Contingency of Funding for Microfinance Organizations

“…A handful of academic studies have examined the overall price of financing in a country, irrespective of lender differences. This work has found that MFOs pay less interest when their nation has strong market-supporting institutions (Tchuigoua, 2014) and when loans come from nations that are politically similar to their own (Garmaise & Natividad, 2013). By comparison, practitioner research has differentiated between funders, identifying two main types: commercial and public.…”

“…In light of past research that has suggested cross-country similarities may affect microfinance funding flows (Garmaise & Natividad, 2013), we controlled for three types of lender-MFO country distance: economic (differences in economic development and macroeconomic characteristics), financial (differences in financial-sector development), and political (differences in political stability, democracy, and trade-bloc membership). Using data collected by Berry and colleagues (2010), we first calculated the average of each distance between the MFO country and all its lender countries, which generated an average score, respectively, for economic, financial, and political distance for each MFO-year.…”

“…Researchers have assumed these funders have different interests and lending practices, but this has not been subjected to rigorous empirical analysis. Academic studies have mostly examined factors that affect the price of funding in a nation (Garmaise & Natividad, 2013;Tchuigoua, 2014). Practitioner studies have differentiated among funders but offer conflicting accounts about their lending practices (Gonzalez, 2010;Von Stauffenberg & Rosas, 2011).…”